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The Endowment Effect

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  • Praveen Kujal

    ()

  • Vernon L. Smith

    ()

Abstract

The divergence between the willingness-to-pay (WTP) and willingness-to-accept (WTA) has resulted in two explanations. First, that this may be due to the manifestation of the endowment effect (Kahneman, Knetsch and Thaler, 1991). Second, the difference between WTA and WTP is directly related with the substitutability of the goods (Haneman, 1991). In this paper we show that one can observe undertrading in markets even if the WTA-WTP discrepancy is negligible. Due to underrevelation of intramarginal units very flat reported inverse supply and demand curves are obtained. As a result very small deviations in reported WTA and WTP can lead to undertrading.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we036226.

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Date of creation: Nov 2003
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Handle: RePEc:cte:werepe:we036226

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  1. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
  2. Franciosi, Robert & Kujal, Praveen & Michelitsch, Roland & Smith, Vernon & Deng, Gang, 1996. "Experimental tests of the endowment effect," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 213-226, August.
  3. Shogren, Jason F. & Shin, Seung Youll & Hayes, Dermot J. & Kliebenstein, James, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," Staff General Research Papers 701, Iowa State University, Department of Economics.
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Cited by:
  1. Amitai Etzioni, 2011. "Behavioural Economics: Next Steps," Journal of Consumer Policy, Springer, vol. 34(3), pages 277-287, September.

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